Three-way crash in stocks, bonds, and currency! The "Sell America" trade returns—why has the market, accustomed to TACO, suddenly changed?

As geopolitical disputes over Greenland intensify and domestic fiscal concerns in Japan set off a global bond selloff, Wall Street’s weeks of eerie calm have been thoroughly broken, and the “Sell America” trade has returned to the spotlight with force.

After Tuesday’s opening, the US financial market suffered a triple blow to stocks, bonds, and the dollar. The S&P 500 plunged more than 2%, not only erasing its gains for the year but also marking the largest single-day drop in over three months.

The VIX index, which gauges market panic, soared to its highest level since November last year. Meanwhile, risk aversion pushed gold prices to a new historical high above $4,700 per ounce, US Treasury yields rose sharply, and the dollar weakened.

This global market selloff was initially triggered by issues within Japan. The yield on Japan’s 30-year government bonds jumped more than 25 basis points in one day as the market grew worried that Prime Minister Sanae Takaichi’s tax cuts and increased spending plan would threaten the country’s finances. This volatility endangered the carry trade of borrowing cheap yen to buy global assets, and drove up bond yields in other regions as well.

Previously, investors tended to “turn a blind eye” to Trump administration actions—including its intervention in Venezuela, threats to neighboring countries, and criticism of the Federal Reserve—but that patience is now wearing thin. Trump’s call for US control of Greenland has spurred fears of worst-case scenarios, such as a breakdown of the NATO alliance or a full-blown trade war.

Amid escalating tensions, some analysts point out that creating market turbulence may be becoming one of Europe’s ways to handle pressure. Michael Krautzberger, CIO of Allianz Global Investors, said: “If I were an advisor to certain European governments, I would say, you almost need to create some market volatility, because Trump really cares about that, possibly more than other politicians.”

Farewell to TACO trades, volatility returns

Over the past month, the volatility of US bonds, stocks, and the dollar had fallen to its lowest level since at least 1990. Wallstreetcn previously mentioned that this abnormal calm was partly due to traders becoming immune to Trump’s rhetoric, betting that Trump would always back down in the end—a strategy known as the “TACO” trade.

However, Tuesday’s market action marked a reversal of that sentiment. As the trading session progressed, the S&P 500’s losses deepened, hitting a new low as Trump listed his first-year achievements in a speech at the White House. In the US bond market, long-term bonds were hit hardest, with the 30-year yield rising 8 basis points to 4.92%, nearing its highs from the end of 2023.

All major US stock indexes fell sharply, led by the Nasdaq and S&P 500

(US Treasury yields rebound)

This global market selloff was initially triggered by domestic problems in Japan. Concerned about the Japanese Prime Minister’s tax cut and spending plans, Japan’s 30-year government bond yield surged more than 25 basis points. This spike threatened so-called carry trades—borrowing low-interest yen to buy global assets—and helped push up bond yields elsewhere in the world.

(Japanese government bond yields rise across the board)

Meanwhile, Trump’s combative stance toward European allies has heightened investor anxiety, providing another reason for the exodus from US Treasuries. Danish pension fund AkademikerPension announced it would liquidate all US Treasury holdings by the end of the month, citing concerns over the massive credit risk created by the Trump administration.

AkademikerPension’s CIO Anders Schelde told Bloomberg: “Basically, the US is not a good credit risk and, in the long run, the US government’s finances are unsustainable.”

Geopolitical contest intensifies market uncertainty

Although most investors believe the US and Europe will ultimately reach a diplomatic solution on Greenland, the White House’s chaotic negotiation style—including Trump adding French champagne to the tariff threat list—is cooling market confidence.

Previously, US stock investors paid little attention to geopolitical frictions, and fueled by an AI boom and strong earnings outlook, equities continued climbing in early January. Bank of America Corp’s latest survey shows investor sentiment had reached its most optimistic level since July 2021, with cash holdings at a historical low.

Now, however, the market has to face uncertainty. Jefferies strategist Mohit Kumar speculates that while a deal may ultimately be reached to ease tensions, it could take months, with increased volatility during that time. He notes: “The beneficiaries of rising geopolitical tensions will be defense stocks, financials, and gold—and we are overweight on these assets in our portfolio.”

Alexis Bienvenu, portfolio manager at La Financière de l’Échiquier, also expressed similar concerns: “The market is a bit worried about how far he will go with this new type of threat. We know that in many cases, Trump has threatened companies and countries with extremely high tariffs, but in the end, he will negotiate.”

Evercore ISI central bank strategist Krishna Guha wrote in a report: “Our baseline forecast is that as investors bet on some form of compromise, the seriousness of the situation will ultimately be kept in check. But if things get out of control, the impact will be quite severe, and will have long-term consequences—including effects on the dollar.”

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